When Capital Gain Is Not Everything

In value investing, there is a very popular term ie intrinsic value of stock. According to Opa Warren, intrinsic value of a stock/company is the value of net asset/equity of the company plus the accumulation of net income that can be acquired in the future, ie as long as the company operates. Thus, when you see that the equity value of company A is US$ 100 million, for example, and there is a strong assumption that the company will be able to generate a decent and consistent earnings over the long term, then the intrinsic value of the company is usually greater than the equity.

'The strong assumption' will only be obtained if the company has a track record of solid performance in the long term, say 5 – 10 years back or more, where the company proved to be able to continue to generate a net profit from year to year. So if you assume that a start-up company, or a company that often suffered losses in the past, to be able to consistently generate net earnings in the future, then it is an illogical assumption.

And that’s why, the calculation of the intrinsic value are usually only valid for blue chip stocks, which the company has operated for decades, and during which they have a track record of solid financial performance. Learn more about this topic in this article.

Later, I realized that not only stocks that have intrinsic value, but also investors. So in addition to 'intrinsic value of stock', through this article I also wanted to introduce the term 'intrinsic value of an investor', and here’s the explanation.

An investor, whether individual or institutional investors, is actually no different from a company. The point is this: If a company has net assets/equity in its balance sheet, an investor also have assets, whether in form of shares or cash, in his investment portfolio. And if the intrinsic value of a stock/company is usually higher than the value of its equity, then, have you ever thought that your intrinsic value as an investor, should also be higher than the value of the assets/funds that already exist in your account?

So let's say you hold an asset, whether in form of shares or cash, of US$ 100,000 in your portfolio, and the asset is entirely yours (you have no loans). Thus, what is your value as an investor? Is it US$ 100,000 too? Well, if you are pretty sure that you are able to manage the asset to generate consistent profit over the long term, then of course: Your intrinsic value as an investor is greater than the value of the assets you hold at this time, because your US$ 100,000 will increase over the time.

But here’s the key words: Are you able to manage the asset? Because if you are not, you will suffer losses instead of making profit, so that your asset will decreases instead of growing.

And if that was the case, then as an investor, you do not have an intrinsic value.

Investor’s Greatest Asset

In some occasions of investment trainings, I always said that an investor has three main assets: 1. The assets of shares/cash, 2. Time, and 3. He himself as an investor. Most people think that the most important asset for an investor is the number 1, ie the existing assets in the portfolio. So if you hold a portfolio that contains stocks/cash worth US$ 1 million, for example, then your overall value is higher than other investors who hold a portfolio of US$ 100,000 only.

In fact, if you did not have enough knowledge and experience which is absolutely necessary in order to manage the portfolio well, then not only US$ 1 million, even US$ 10 million is worthless because you will lose constantly.

On the other hand, an investor who start his investment career with an initial capital of US$ 5,000 only, would seem as a tiny fish for a while. But if he is able to invest his time to continue to learn and gain experience, then after some time, he will eventually become a reliable investor, and his US$ 5,000 million would grow by itself.. and continue to grow.. unless he decided to stop investing.

So I would lika to say that, the most valuable asset of an investor is himself, in which his quality as an investor will improve significantly if he is able to keep learning and gather experience. As to the value of assets in portfolio, it will increase by itself in line with the increase of knowledge, and the increasing experience of the investor himself. In this condition an investor can be said to have an intrinsic value, where he knows that his equity will increase over the time.

As an investor, what is your greatest asset? Yourself!

Improve Yourself

Most investors/stock traders in the world usually only focus on the effort to make a profit, where gain is everything. An investor will usually feel happy if he gained huge profits from a particular stock. On the other hand, he may not see anything wrong if after one year, for example, he did not learn anything.

But just think about it: No matter how good you are in investing, but you can make profits or suffer losses at any time, so that the value of your portfolio can also go up and down all the time. But if you keep learning, the quality of yourself as an investor would never decrease one bit, but will continue to increase over time.

And no matter how deep the losses that could be suffered by an investor of high quality, but in the end he will be back to make profits, even bigger profits! At the global crisis of 2008, all the investors suffered a loss in the Indonesian Stock Market. But only those who had knowledge and were experienced enough, and also have a vision of the future, which are able to survive and succeed to immediately make huge gains in the following year (2009). Opa Warren also often suffer large losses whenever the Wall-Street was in crisis. But because he was basically a real investor, then he always managed to be rich again when the economy and stock exchanges recovered.

Therefore, rather than trying to make gains every day, through this article I want to invite you to focus on developing your real and most valuable asset: Yourself. Because, trust me, when you've become a reliable investor, the money will follow by itself.

The problem is, most investors prefer to spend (or waste, to be exact) their time on things that are not useful, such as talking about ‘what stocks that will profit today?’ on social media, watching the running trade, read ridiculous rumors, and so on. There are not many investors who willing to spend their time for some things that more productive, such read articles or books (about value investing of course, not the other), analyzing the fundamentals of a company as a whole, evaluating the portfolio and improve the ways of investing, and so on.

While these are the only ways on how you can improve the quality of yourself as an investor. No matter how long an investor has been in the stock market, but if during which he still does not understand anything, or understand it wrong (read: not become a value investor) then he’s no different than a beginner.

But if you could do that, then that's it, you already have an intrinsic value as an investor, and it’s just a matter of time before the value of your investment will be great.

So now you know what to do. And here’s my advice: Do it now, because the clock is ticking. Keep learning, keep improving your skills in investing, until you'll eventually reach a point where not only your equity increased significantly, but you will also be able to see that what you have is actually much greater than what already exists in the portfolio. Good luck!

Any inquiries about investment in Indonesia Stock Market? Please send an email to teguh@averepartners.com.